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Board composition, monitoring and credit risk: evidence from the UK banking industry

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Abstract

This paper examines the effects of board composition and monitoring on the credit risk in the UK banking sector. The study finds CEO duality, pay and board independence to have a positive and significant effect on credit risk of the UK banks. However, board size and women on board have a negative and significant influence on credit risk. Further analysis using sub-samples divided into pre-financial crisis, during the financial crisis and post crisis reinforce the robustness of our findings. Overall, the paper sheds light on the effectiveness of the within-firm monitoring arrangement, particularly, the effects of CEO power and board independence on credit risk decisions thereby contributing to the agency theory.

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Notes

  1. Here, the takeover process is seen as a discipline mechanism on firms, allowing control to be transferred from inefficient to efficient management teams and encouraging convergence of interest between the corporate managers and shareholders (Franks and Mayers 1990).

  2. In 2014, the Basel Committee introduced a complementary leverage ratio which is not risk-weighted. This is because pillar 1 risk-weighted Basel II/III capital ratio has been criticized for the following reasons: insufficient capital in a recession, complexity, open to gaming, lack of robustness, and fear of excess leverage in the economy (BCBS 2014). The risk based measure is used as robustness check.

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Acknowledgements

We would like to thank Dr Cheng-Few Lee (Editor), the Journal reviewer for the constructive review, Professor Kose John, Professor Iftekhar Hasan and the participants of European Finance and Banking Conference, Bologna, Italy, September, 2016.

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Authors and Affiliations

  1. The Business School, Liverpool Hope University, Liverpool, UK

    Jia Lu

  2. Glasgow School of Business and Society, Glasgow Caledonian University, Cowcaddens, Glasgow, G4 0BA, UK

    Agyenim Boateng

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  1. Jia Lu
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Correspondence to Agyenim Boateng.

Appendix

Appendix

See Table 7.

Table 7 Robust test—UK banks’ board composition and monitoring on credit risk
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Lu, J., Boateng, A. Board composition, monitoring and credit risk: evidence from the UK banking industry. Rev Quant Finan Acc 51, 1107–1128 (2018). https://doi.org/10.1007/s11156-017-0698-x

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